It is obvious that the activities of a regulator come at a cost: there is the cost to the regulator itself in terms of its own budget and the cost to those that it regulates, either the direct costs or the hidden costs, having set up systems to ensure compliance. Obviously all this can be a considerable economic burden, and it is therefore extremely welcome that the Government have emphasised in the Explanatory Memorandum, and indeed in the Bill, the importance of regulators having to have regard to the promotion of economic growth and to report thereupon.

One of the ways in which it happens that regulators are kept under control is that they have a budget within which they have to live. This forces a degree of focus by the regulator on the essential aspects of its duties; in effect, it concentrates them on the must-haves rather than the nice-to-haves. I am concerned that there may be ways for regulators to avoid these budgetary constraints and instead end up with a great deal of nice-to-haves that may not have a commensurate cost/benefit relationship.

I have explained this to the Bill team because it is quite a specialist point: in the Financial Services and Markets Act, which I am using as a practical example, Section 166 is called “Reports by skilled persons”. Section 166(1) says,

“The Authority may, by notice in writing given to a person … require him to provide the Authority with a report on any matter about which the Authority has required or could require the provision of information or production of documents”.

That is very widely drawn section, and Section 166 inquiries have become very prolific in the financial services area. There are organisations that have several of these running. The regulator comes along and says, “We’re not satisfied about this aspect of your operation, and under Section 166 we instruct you to get a skilled person to provide an independent report on it”. The skilled person will be an accounting firm or maybe a lawyer. The regulator continues: “The report is to be sent to us and the bill is to be sent to you, the firm”. These reports will cost probably a couple of hundred thousand pounds by the time they have reached the end of the road.

This means that there is no financial constraint on the regulator because the regulator can pursue issues without concern as to the operational impact of their own organisation. I accept that the wording is almost certainly imperfect, but the amendment is designed to require regulators to disclose when they are subcontracting regulation so that we can have an independent idea of what they are spending outside their own budgets. I am not saying that the regulator should not be able to do that, but I am anxious to make sure that proper disclosure takes place. I am not sure whether other regulators—I have given the financial services sector as an example—are engaged in the same practice. Of course, it is challenging to get the drafting right because these additional costs are invoiced to the regulated firms, not to the regulator.

There is an issue here that needs addressing if the Government are to achieve fully their welcome objective of getting a regulatory system that is focused and effective but run with regard to the costs being incurred. I beg to move.

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7 pm

Baroness Neville-Rolfe: I thank my noble friend for tabling this amendment, which seeks to include in the Bill a specific reporting requirement for regulators subject to the code to provide details of the activities, including costs, of any organisation employed to undertake work on their behalf. At the heart of the amendment lies a concern about the hidden costs to business. The example that he gave was that financial service regulators may seek to discharge their regulatory functions by using their powers to commission reviews by “skilled persons” and charging the businesses concerned for the cost of that work. As I understand it, that is at the heart of the problem that my noble friend has identified.

My noble friend is right to seek transparency and accountability about how these powers are used and I think that we have made some progress in this area. Both the FSA and the PRA now routinely publish information on their Section 166 Financial Services and Markets Act 2000 activity. This includes quarterly reporting on the number of skilled persons reports that they have commissioned and annual reporting on the aggregate costs of these reports. As my noble friend probably knows, this information is available online. It seems to me that the disclosure that he seeks is being addressed and I am not sure that there is harm elsewhere that justifies creating new regulation in this area. In the interests of brevity, I do not see a case to amend the Bill and ask him to withdraw the amendment.

Lord Hodgson of Astley Abbotts: I am grateful to my noble friend for that full response. One of the questions is, of course, that I just happen to know about the financial services area, where there are lots of regulators that we are considering as part of this section of the Bill. It would be helpful if we could try to ascertain whether other regulators are engaged in the same process because it enables them to add to the regulatory burden very considerably. I am grateful for the comments and the further research that the Bill team have done on this matter and I beg leave to withdraw the amendment.

Amendment 49 withdrawn.

Amendments 49ZA and 49A not moved.

Clause 14 agreed.

Amendment 49B

Moved by Lord Mendelsohn

49B: After Clause 14, insert the following new Clause—

“Report on money laundering regulations

(1) The Small Business Commissioner shall prepare and publish a report assessing a regulator’s performance and effectiveness at ensuring regulations are proportionate, user friendly, widely promoted and easily adapted by small businesses in relation to money laundering regulations.

(2) The report provided for by subsection (1) must include an assessment of the role of the Financial Conduct Authority and its activities to encourage awareness of the impact of money laundering regulations on small businesses.

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(3) In this section a regulator is a person with regulatory functions to which section 108 of the Deregulation Act 2015 applies.”

Lord Mendelsohn: My Lords, I should declare at the start of these amendments that I am regulated by the FCA, so this is actually terribly in my interest. This relates to being able to give small business some guidance. Very briefly, money-lending regulations apply to a whole range of small practices ranging from financial and credit services, accountants, lawyers, estate agents and a number of others.

As ever, the regulations are quite complex within this context; there are duties to assess the risk of the business, your own business activity being used by criminals, who you are conducting business with, checking the identity of beneficial owners, monitoring their business actions and reporting on management control systems, or keeping documents and making sure that you are training your employees. I am bound to say that as ever, these obligations on companies that try to comply are very hard on them indeed; small businesses in particular find that very tough. For those who have no intention of bothering to comply with them it is exceptionally easy; I cannot say this comprehensively, but in cases that I checked the fines are significantly smaller than the costs of having to comply by having a compliance adviser or other sorts of people.

We therefore hope that the Small Business Commissioner will be able to play a role here to help define what is good activity rather than the constant uncertainties that happen, especially over something such as this. Is it sensible for a small business with two or three people in one of these areas to have to phone up the company secretary at a FTSE 100 company to say, “Can I have the passports and identity checks of your company directors?” and to have to carry on referring them in those sorts of circumstances? Perhaps this may not be a formal role, but this now famous annual report may well have some provisions which will be helpful to at least simplify this for small businesses.

Secondly, on awareness of share sale fraud—I apologise that we may not have drafted this to the most exacting standards that we would otherwise have liked to have done—I will try to give noble Lords the thrust of the measure. Again, small businesses are particularly vulnerable to a number of frauds that take place where people try to sell bogus financial services and products and other sorts of things. This affects areas where online fraud is established or verified through the use of things such as addresses or other sorts of things as well as when online and offline meet. We are trying to give the regulators some ability, obligation or duty to communicate; hopefully the back end of how that might work best for government would be between the enforcement agencies and the regulators. I will give a great example, which was, of course, when City of London Trading Standards sought a conviction against Regus Management, which housed just the address of a particularly fraudulent scheme. When contacted by—on this occasion—consumers, the company said that its offices were based there, when, of course, it was just a postal address. Just by saying that it was based there gave it a credibility which led to a couple of people being defrauded.

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It is also very useful to know that the police are now enforcing a crackdown on boiler room fraudsters in the City of London and Canary Wharf. This is good practice; we would like to encourage regulators to get the message out so that there is reasonable coverage across the rest of the country. This is just about trying to place a duty on them to try to make sure that something can be done to help support small businesses across the country. I beg to move.

Lord Hodgson of Astley Abbotts: I cannot resist, although I know that the Committee is like a horse heading for the stable, therefore I shall be very brief indeed. On the comments made by the noble Lord, Lord Mendelsohn, on money laundering, this area has a life of its own, and the impact on smaller businesses is stupendous and without any real evidence of any efficacy whatever. This area is still growing, and the tentacles of bureaucracy are widening all the time, therefore the burden will be greater. I therefore very much support the idea that we take any steps to make sure that it is effective—not that we should not do it, but that it is effective. That is the thrust of the noble Lord’s Amendment 49B and trying to make sure that we try to prevent the further spread of this. I have today received a request about money laundering from my clearing bank. When I left university in 1964 I went to work in America. The bank has written to me saying, “We see you worked in America in the 1960s; tell us what you were paid as part of our money laundering investigation”. What that can possibly add to its knowledge of me 50 years ago I cannot possibly imagine. If you use the term “money laundering” everyone says it must be a good idea. It will require a big effort to make sure that we are effective. The question is: are we stopping people doing these terrible things, not just spraying information around and ticking boxes? Therefore, all power to the Minister.

Baroness Neville-Rolfe: My Lords, I share the sentiment behind Amendment 49B to ensure that regulators have regard to the needs of business when dealing with money laundering requirements. As I used to say when I was on the Back Benches, the regime was excessively burdensome and some businesses feel confused by overlapping or restrictive guidance. However, these concerns cannot be addressed by simply looking at how regulators deal with small business. There may be examples of requirements that are particularly difficult for certain entities, but it is the interactions between different types of business and with the banks that is at the heart of the problem. So small companies with innovative business models or ways of complying with requirements, to know their customers, may find it difficult to maintain business relationships with large banks which do not understand how a particular model works. The bank may simply decide not to do business, rather than expose itself to the risk that the small company is being used for money laundering.

Difficulties can be caused by the guidance that is produced by the various regulators and supervisors. That is why we are looking at the regime in the round. We are now running a Cutting Red Tape review of money laundering controls. It is important that companies

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that are genuinely confused about what they need to do have this confusion addressed. Our call for evidence is open until 6 November—my husband is planning to send sacks of stuff—and we are keen to speak to all NGOs, businesses and trade associations with an interest, particularly SMEs.

We want to examine more seriously the potential to improve compliance and efficiency, by identifying aspects of the good supervisory regime that appears to businesses in the regulated sector to be unclear, cumbersome, conflicting or confusing. We are already speaking to a broad range of sectors and we would be very pleased to have examples from your Lordships. The Government understand that the regime can be improved. We published the first national risk assessment for money laundering and terrorist finance risks on 15 October and one of the findings was that the supervisory regime was inconsistent. We accept that this needs to be addressed.

The evidence being gathered by the BRE will help to inform work under the Government’s action plan to reform the regime and to ensure that it is consistent; treats large and small businesses sensibly and proportionately; and follows a truly risk-based approach allowing resources to be targeted at the areas that are at greatest risk of money laundering and terrorist financing. These are also important policy objectives which must not be forgotten in today’s discussions.

I hope that gives some reassurance. I have a good deal of excellent detail on Amendment 49D in relation to investment fraud, but given the lateness of the hour, I wonder if the Committee would like me to write about that. I think it means that we do not need to amend the Bill, but a lot of good work is being done by the FCA which I would like to share with noble Lords and give more publicity to in order to get after the scammers. I hope that the noble Lord will feel able to withdraw his amendment.

Lord Mendelsohn: I did not quote the noble Baroness on this one, I am saving that for later and some significant quotes that she made on other amendments. The argument was not about what small business’s compliance is able to do in transactions with the bank. I understand the Minister’s point, but the issue is really about small businesses being able to establish that they have fulfilled their regulatory duties, which would not have that consequential action.

Baroness Neville-Rolfe: The review is obviously very open. I was trying to explain that if you do a review that engages only small business, you will not necessarily be able to get the same savings as you would otherwise. I have come across this for example with estate agents: if you buy a property, and are a perfectly respectable person, you have to go through all the detail that the noble Lord was describing. If you are a company director, you are constantly having to produce ID again and again. If you take the 5.4 million businesses and find a saving, that is a lot of burden reduction. Obviously, equally, if you impose new burdens, and multiply that by 5.4 million, there is a problem. That sort of technique needs to be applied, which is what the BRE is doing with this study. We will certainly make sure that the noble Lord’s point is properly considered.

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7.15 pm

Lord Mendelsohn: I do not want to labour the point, but especially in relation to estate agents, the difference is that it is disproportionate to expect an estate agent to establish the proper beneficial owners and other things. Banks, which have more resources to be able to do it, are much better placed. This was just about getting the balance right. However, I accept the point about the review. It felt like one of those sessions where so much was shared that I almost felt like unloading about being a politically exposed person and how often that becomes a bit of a

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problem, but I will leave that for another occasion. I beg leave to withdraw the amendment.